ondon - BT
Group reported a sharp drop in third-quarter profit, as an accounting scandal
in Italy forced a writedown, muting gains in the company’s consumer and mobile
businesses.
Profit fell 53
percent to 374 million pounds ($469 million), BT said Friday in a statement.
That included a 245 million-pound provision to lower the value of the Italian
business. This week, the former UK telecommunications monopoly disclosed years
of irregularities in Italy, and also lowered its profit outlook as UK
government clients and international corporate clients cut back on spending.
Underlying revenue fell 1.5 percent.
The results cap
a week of turbulence for BT and follow the biggest blow to the reputation of
Chief Executive Officer Gavin Patterson since he took the helm in 2013.
Patterson has focused on transforming a company long dependent on bulky government
contracts into a consistent consumer-focused brand, with the acquisition of EE
and investments in sports TV content. He is also facing a ballooning pension
deficit, regulatory battle and political pressure to invest more in fibre.
“The situation
in Italy is very serious but we mustn’t lose sight of the fact that BT remains
in good health overall,” Patterson said on a call with journalists. “We’re a
profitable company with some very strong businesses and we’re generating strong
cash flow.”
False invoices
Patterson said
the problems in Italy were under control and limited to a small number of
people, and the company is working with authorities. The company suspended its
two top executives at the unit in September, and they have since left the
company. Bloomberg News reported Thursday that Andrea Giovanni Bono, the head
of BT’s businesses in Switzerland, the Nordics, central and eastern Europe and
Russia, will take over the Italy role on Feb. 1.
“It was a very
sophisticated manipulation of the profitability of the business,” Patterson
said on the call. “False invoices, off-balance sheet loans, these types of
things, and it turned out to be bigger than we thought.”
The managers in
Italy effectively lied to auditors, Patterson said. “It can be very challenging
to find out unless you’ve got forensic accountants and that’s what we’ve done
in the last quarter, we’ve really got underneath this issue, we’ve scaled it,
that ended on December 31, BT reported a 32 percent increase in revenue to 6.13
billion pounds, aided by the acquisition of EE a year ago. Patterson had guided
toward a “mixed bag” of financial results Tuesday, pointing to solid
performance in the consumer business, mobile unit EE and network division Openreach.
On Friday, he highlighted growth in those businesses and improvements in
customer service.
Mobile growth
EE recorded
revenue growth helped by strong demand for the company’s mobile services, BT
said. The company said it added 276 000 new mobile customers paying monthly.
The company also had record demand for fibre broadband at Openreach with 498 000
homes signing up for faster speeds, it said.
Among BT’s
public-sector and major-business customers, revenue fell 15 percent. A number
of large government contracts are ending, the company said, and some contracts
are winding down more quickly than it expected, and “the current market is not
providing the opportunity to replace these with profitable new business.”
BT shares fell
0.4 percent to 300.95 pence at 8:18 a.m. Friday in London. The stock is down 18
percent this year.
Moody’s on
Thursday underscored the company’s challenges, signalling a possible cut
to the rating by lowering its outlook on BT’s Baa1-rated debt to negative.
BT on Tuesday
cited “inappropriate behaviour” and “improper accounting practices” going back
several years in Italy, meaning a business it had said was profitable had long
been losing money. It disclosed a 530 million-pound writedown over the
accounting irregularities, more than triple a figure given in October when the
company first discussed the investigation. The stock slid 21 percent on
Tuesday.
Nick Rose, the
chairman of the BT board’s audit committee, has flagged internal-control issues
in Italy in every annual report since May 2013.
“It’s fair to
say the audit committee have looked at Italy a number of times in the last few
years, but the audit committee were misled in the same way that the management
was misled,” Patterson said on the call.
It’s too early
to say whether BT will start a replacement process for PricewaterhouseCoopers,
its accountant for decades, any earlier than the 2019 requirement, Patterson
said.